Why US Car Makers Bounced Back From The Tsunami So Fast

While Japan's March 11 earthquake did not damage the global
supply chain as badly as initially feared, the world's automakers
- particularly those based in Japan - have faced a tougher road
to recovery.

Thanks to a smaller reliance on Japanese parts and a quick
response to the crisis, U.S. automakers have weathered the
disruption to their supply chains well, with minimal impact on
production.

The Japanese automakers, however, with their strong reliance on
the just-in-time inventory system and preference
for single-source suppliers, have struggled to get back on their
feet and stand to lose market share, at least in the short term.

"In the race to provide better quality at lower prices, manufacturers picked very narrow, optimized supply
chains," said Willy C. Shih, Professor of Management Practice
in the Technology and Operations Management unit at Harvard
Business School. "They put all of their eggs with one supplier
that had the best product at the lowest price."

Toyota, which in 2008 surpassed General Motors Company (NYSE:
GM) as the biggest automaker in the world in total
sales, essentially invented the just-in-time supply strategy that
has become more of a liability.

Although all of Toyota's assembly plants were back online by
mid-April, they could only operate at about half of capacity due
to parts shortages.

The supply chain trouble soon spread throughout the Japanese
automakers' global operations. In April, the company closed its
plants in the United States and Canada on Mondays and Fridays and
throttled production back 50% the remaining three days.

To make matters worse, possible shortages of electricity in Japan
could hamper production at both the parts factories and the auto
assembly plants.

Toyota said it hopes to get global production to 70% of normal
levels this month, but does not expect to reach full production
until at least November. Honda is hoping to get back to normal
this summer; Nissan by October.

The disruption is hitting Toyota's bottom line hard. Profits
plunged 77% for the first quarter of 2011, Toyota said. Since the
earthquake occurred near the end of that quarter, the poor
first-quarter performance doesn't bode well for the current
quarter.

Likewise, Honda's profit declined 38% in the March quarter.
Nissan's profit reversed a year-earlier loss; it suffered less
damage to its operations than its rivals and figures to exploit
that advantage.

The reliance on single-source domestic suppliers - partly a
consequence of the deep loyalties treasured in Japanese corporate
culture - has magnified the disaster's impact on Japan's auto
industry. But with that system's drawbacks now exposed, Japanese
executives may begin to reconsider the wisdom of such exclusive
relationships.

Meanwhile, U.S. automakers, because they use a far lower
percentage of Japanese parts in their vehicles and are far more
willing to use alternate suppliers if necessary, have sustained
far less damage to their businesses than their Japanese
counterparts.

In fact, Japan's role as a supplier is not nearly as large as it
once was, mitigating the quake's impact on the global supply
chain for many industries. China by far is the world's biggest
supplier of parts and materials; Japan is eighth on the list -
tied with Canada.

Nevertheless, the threat was significant - the lack of just a few
components could have forced costly shutdowns of entire assembly
lines for days or weeks. But the U.S. automakers responded
swiftly to mitigate the impact of any hiccups in their supply
chains.

Chrysler Group LLC, which traditionally shuts down
its factories for one- or two-week periods over July and August,
has moved up the breaks for three facilities to June to conserve
parts. Chrysler hopes the maneuver will buy time for suppliers to
recover, or for Chrysler to identify alternative suppliers as
needed.

Another U.S. automaker that attacked the problem aggressively was
GM. Although only 2% of GM's parts come from Japan, many models
cannot be built without them.

Within four days of the Japan quake GM had created a crisis task
force of hundreds of employees to assess the impact on its supply
chain. The team identified 118 parts that could run out. Then,
the focus turned to finding alternative suppliers while helping
its main suppliers get back online as soon as possible.

GM even sent 40 employees to Japan to observe first-hand the
issues facing the suppliers.

"Our objective was to help the suppliers get back into
production, not to re-source the parts somewhere else," Ronald
Mills, GM's executive director of engineering and program
management, told The New York
Times. "We like the parts we had."

By mid-May, GM had reduced the number of parts on the watch list
from 118 to five. Despite some lingering issues, Chief Executive
Officer Daniel F. Akerson said supply problems from the quake
would have no material impact on GM's earnings.

Surprisingly, the quake has had minimal impact on industries
other than auto manufacturing, but the other industries would do
well to learn from the experience.

If nothing else, the quake may serve as a wake-up call to all
companies to re-think their supply chain strategies and have
contingency plans ready to go for the next disaster.

"There are a lot of moving parts in this, and it will be
interesting to see how it works out," said Harvard Business
School's Shih. "Companies need to understand the depth of their
supply chains and critical dependencies. Then they can think
through how 'narrow' is the optimum solution, and the
cost/benefit tradeoffs of steps like incorporating more supplier
or geographic diversity."